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Stocks Plunge as U.S.-China Trade War Escalates

Stocks plunged Friday after China said it would impose additional tariffs on U.S. goods, prompting a string of tweets from U.S. President Donald Trump and—after the market close—the announcement of U.S. retaliatory tariffs on Chinese imports. The S&P 500 index fell by 2.59%, while the Dow Jones Industrial Average lost 2.37%.

The actions escalated a long-running trade war between the two countries. China’s new tariffs would target $75 billion of U.S. goods, including oil, autos and soybeans. The implementation dates coincide with the United States’ previous threatened tariffs on Chinese goods, with some taking effect on September 1st and the remainder on December 15th.

After the market close, Trump tweeted that he would raise U.S. tariffs on Chinese imports even more, increasing existing duties on $250 billion in Chinese products to 30% from 25% on October 1st. Meanwhile, tariffs on another $300 billion in Chinese goods set to take effect September 1st will be 15% instead of the original 10%.

In another tweet, Trump “hereby ordered” American companies “to immediately start looking for an alternative to China.”

“While the White House does not appear to have any mechanism to enforce such a request, the tweet will enflame already-high tensions between the two nations,” says Michael Townsend, Schwab's Vice President, Legislative and Regulatory Affairs.

Recession fears rise

The escalation of the ongoing trade war yet again raised concerns about the weak state of global growth and growing recession risk.

“If—or when—the next round of announced tariffs on Chinese goods is implemented, the estimated total direct hit to U.S. real gross domestic product would be nearly a half percentage point—and that doesn’t include the indirect hit to consumer, business and investor confidence, or the impact of China’s retaliatory tariffs,” says Schwab Chief Investment Strategist Liz Ann Sonders.

Additional tariffs are also likely to keep Treasury bond yields low and the yield curve inverted—a situation in which longer-term yields are lower than short-term yields. Yield curve inversion has often—but not always—preceded a U.S. economic recession, although the lead time can be long and variable.

“The ongoing trade war can lead to even slower global growth, resulting in greater demand for U.S. Treasuries as investors seek out high-quality investments,” says Kathy Jones, Chief Fixed Income Strategist for the Schwab Center for Financial Research. “With more than $16 trillion in negative-yielding debt across the globe, Treasury demand is likely to remain high, preventing yields from rising much. If the trade conflict continues to escalate, 10-year Treasury yields could test the all-time low of 1.32%.”

Federal Reserve policy also a focus

Federal Reserve officials held a symposium in Jackson Hole, Wyo., on Friday. While it wasn’t a policymaking meeting, Fed Chair Jerome Powell made remarks afterward that suggested the Fed may continue to reduce interest rates, saying the Fed “will act as appropriate” to sustain the economic expansion. However, Powell warned that the Fed’s tools weren’t well-suited to address trade policy uncertainty.

The statement attracted the ire of the president, who tweeted shortly afterward, “As usual, the Fed did NOTHING!” Trump later referred to both Powell and China’s President Xi Jinping as an “enemy,” indicating that policy uncertainty is likely to continue.

The Fed’s next policymaking meeting is September 17-18, and it is widely expected to cut rates then for the second time this year. The Fed previously cut its benchmark federal funds rate by 25 basis points in July.

“Although the federal funds futures market is pricing in the possibility of a 50-basis-point cut in September, a 25-basis-point cut seems more likely,” Kathy says.

However, Kathy noted, lower rates alone may not be enough to offset the negative impact of a prolonged trade dispute or slower global growth.

What investors can consider now

Don’t panic. Market drops are an unavoidable feature of investing. What matters is how you respond—or, more to the point, don’t respond. Sometimes the best action to take is no action at all, especially in situations where the volatility is being driven by political events, such as trade friction. Much of the recently poor stock market performance is driven by policy positions that, if reversed, could cause markets to recover quickly.

Review your risk tolerance. Investors often feel differently about risk when markets become volatile, and volatility is likely to remain elevated for the time being. If you are uncomfortable with recent market volatility, you may want to consider some defensive positioning to reduce portfolio risk. If you’ve built a portfolio that matches your time horizon and risk tolerance when markets are calm, a surge in turbulence may not feel so rough to you.

Review your risk capacity. Risk tolerance, essentially, is a matter of how much risk you can stomach. But there’s another way to think about risk, especially for people in or near retirement: How much risk can you afford, and when will you need some of your money back? If you’re likely to need money from your portfolio within the next couple of years, you may want to take steps to ensure you will have the liquidity you need, and won’t be forced to sell riskier investments, like stocks, in a down market.

Rebalance regularly. The markets have experienced both large gains and sharp reversals this year, which may have knocked portfolio allocations off course. Rebalancing means selling some investments that have done well, and investing the proceeds in investments that have underperformed, to bring your portfolio back to its original asset allocation. It’s a good idea to do this on a regular basis.

What You Can Do Next

Focus on the long-term. If you’ve built a solid financial plan and a well-diversified portfolio, it’s best to ignore the noise and focus on your long-term goals. Get additional guidance from Schwab’s experts on strategies for weathering market volatility.

If you need a plan, consider Schwab Intelligent Portfolios Premium™. You’ll have access to aCertified Financial PlannerTM professional who will collaborate with you to develop a financial plan tailored to your goals.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Investing involves risk including loss of principal.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.

A bond ladder, depending on the types and amount of securities within the ladder, may not ensure adequate diversification of your investment portfolio. This potential lack of diversification may result in heightened volatility of the value of your portfolio. You must perform your own evaluation of whether a bond ladder and the securities held within it are consistent with your investment objective, risk tolerance and financial circumstances.

The S&P 500 Index is a market-capitalization weighted index that consists of 500 widely traded stocks chosen for market size, liquidity, and industry group representation.

The Dow Jones Industrial Average is an index that tracks 30 large, public companies trading on the New York Stock Exchange and the Nasdaq.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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